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Tag: investing

  • Start investing early even on limited income

    In this post, I want to convince people in their early 20s to start investing, even if they have a limited income. I will highlight the power of compounding, the accessibility of small investments, and long-term wealth growth backed by historical data to support my argument.

    1. The Power of Compounding


    If a 22-year-old invests just $100/month into an index fund with an average annual return of 8%, they’ll have over $383,000 by age 62.
    In contrast, if they start investing at 32 and contribute the same amount, they’ll only have $174,000 by age 62.
    Takeaway: Starting 10 years earlier results in $209,000 more, even with the same contributions.

    So, as we saw compounding works better with time, the earlier they start, the longer their money grows exponentially. Also, it doesn’t matter how little you start with, even a small amount invested early often beats larger amounts invested later.

    2. Investing Doesn’t Require Huge Income

    A common belief people have is that they need to earn 100k or more to start investing. This is far from being true. Many brokerage apps like Robinhood, Fidelity, or Vanguard allow people to invest with as little as $1. ETFs like Vanguard’s VOO (S&P 500 tracker) have no minimum investment if purchased fractionally.

    One of the ways to do that is by reallocating small expenses like $5 daily coffee runs:

    • $5/day × 30 days = $150/month.
    • Investing this monthly could grow to $575,000 in 40 years (assuming an 8% annual return).
      So, as we saw, even tiny sacrifices can snowball into a significant nest egg.

    3. Opportunity Cost of Waiting

    The economist in me has to bring this up – opportunity cost, which means the best use sacrificed. Do you know that if you wait 10 years to invest, you would have to contribute 3x more monthly to catch up?

    When you Invest at 22, $100/month for 40 years, you get $383,000.

    However, if you wait and start investing at 32, $300/month for 30 years, you will only get $379,000

    Skipping investing early means people can lose the “free growth” from compounding during their 20s.

    4. Risk Appetite in Their 20s

    Another big reason to start early is that most young investors can afford to take risks because they have decades to recover from market downturns. This is the best time to invest in higher-growth assets like stocks, as opposed to bonds or savings accounts, which pay less returns.

    Historically, the S&P 500 has returned 10% annually on average. Even with the short-term volatility, long-term investors consistently benefit as seen from the upward slope of the S&P 500 index from its inception till date. If you look at any 8-year window picking any two data points, it has always gone up.

    In the following section I will give you a step-by-step breakdown of how to start investing in your early 20s:

    Step 1: Open an Investment Account

    First, you need a platform to start investing. The two most beginner-friendly options are:

    1. Roth IRA: A retirement account with tax-free growth and withdrawals (best if you qualify based on income).
    2. Brokerage Account: A general investment account without restrictions on withdrawals.
    • How to do it:
      1. Research platforms like Vanguard, Fidelity, or apps like Robinhood or M1 Finance.
      2. Sign up online, which would take 10-15 minutes.
      3. Link your bank account to transfer money.
    • Pro Tip: Choose platforms with no account minimums and low fees.

    Step 2: Start Small (Even $10 a Week)

    Small, consistent contributions add up over time due to compounding. You don’t need a lot of money to begin.

    • How to do it:
      1. Determine an amount you can comfortably set aside. For Example, you can start with $10/week or $50/month.
      2. Use the platform’s fractional investing option to buy partial shares of ETFs or index funds (like Vanguard’s VOO or SPY).
    • Pro Tip: Here is a real-life example, if you spend $10 weekly on streaming services, consider cutting back slightly to reallocate this toward investing.

    Step 3: Invest in Low-Cost Index Funds or ETFs

    These funds spread your money across many companies, lowering risk and giving reliable long-term growth.

    • How to do it:
      1. Search for funds like S&P 500 ETFs (e.g., VOO, SPY) or Total Stock Market Index Funds (e.g., VTI).
      2. Click “Buy” on your app and input the amount you want to invest (e.g., $10).
      3. Confirm your purchase.
    • Pro Tip: Look for funds with low expense ratios (fees below 0.1% are good options).

    Step 4: Automate Your Investments

    Automation ensures consistency, making investing a habit without needing effort.

    • How to do it:
      1. Set up recurring deposits from your bank to your investment account (e.g., $50/month).
      2. Enable auto-invest for specific funds to keep investing the same amount regularly.
    • Example: You won’t even notice $10 disappearing each week, but your portfolio will grow quietly over time. Dollar-cost averaging is an investing technique, where you invest a fixed amount every week or month without worrying about market movements.

    Step 5: Track Progress & Stay Consistent

    Seeing growth (even small) will motivate you to stick with investing. But remember, it is investing and is done for the long term. Don’t let the short-term market fluctuations affect you emotionally.

    • How to do it:
      1. Check your account monthly or quarterly—not daily! Markets fluctuate over the short term and some months or years you will see a dip in your investments. But if you have invested in a diversified group of companies, significant growth starts happening after 5 years of investing consistently. The longer the better.
      2. Increase contributions as your income grows. For example, you can gradually contribute more. Go from $50/month to $100/month when you get a raise.

    Final Note:

    If you follow these steps:

    • Investing $10 a week with an 8% annual return can grow to $87,000 in 30 years.
    • But gradually increasing your contributions will multiply this amount significantly.

    The key is starting now—every year you wait, you lose out on making compound interest work in your maximum favor. Time in the market makes a big difference!

  • The power of investing – time and regular contributions

    In my previous post, I mentioned how the time duration of your investment and regular contributions are the two main reasons for your investment growth. In this post, I will explain this point with the help of a simple example.

    Scenario 1

    Let’s assume person A invests $1000 at age 20 and contributes $100 a month until she is 60. When we do the math, she will have over $763,000 at age 60, assuming the annual return is 11% and annual compounding. On average, the stock market gives you a 10-11% return over a long period.

    I calculated the numbers using this excellent investment growth calculator here. You can see how your investment will change by playing with different number combinations. It is fun, try it.

    In the chart below, you can see her total contributions (in green) are less than $60K, while her future value of the investment has grown to over $760K. Her investment grew by a whopping 12.7 times!!! Isn’t this just awesome?

    See how the red line goes way above the green line, esp. towards the end. This shows the power of compounding or exponential growth as the time duration increases.

    Scenario 2: Changing the time duration of Scenario 1

    Now, let’s assume she starts investing at age 40, and not at 20 but still contributes $100 monthly with the same 11% return. At 60, she will only have around $85,000 and her total contributions would be around $24000. So her total investment grew by 3.5 times compared to 12.7 times in the first scenario. You see the difference!

    Scenario 3: Changing the monthly contribution amount of Scenario 1

    If I change her monthly contribution to $200 (leaving everything else the same as in scenario 1), the total investment will grow to $1.4 million after 40 years. Isn’t this even more awesome?

    Scenario 4: Changing the initial investment amount and reducing the time of Scenario 1

    But what if she starts with a bigger initial investment of $50,000? In 20 years, with monthly contributions of $100, the money will grow to $480 K, which is still less than $760 K above.

    This simple example teaches a fundamental concept in investing. Time and regular contribution are the two most important factors in making your investment grow!

    In all the charts above, you will notice a steep increase towards the latter years.

    Just keep in mind that these numbers are in nominal dollars, not adjusted for inflation. Since money loses its value over time due to inflation. Your real return is always less than the nominal return, by the inflation rate. On average after adjusting for inflation, the return in the stock market has been close to 7-8%.

    So guys, hopefully, this post convinced you enough, so you can start investing for your future without further delay. Small contributions done regularly and starting early can make your investment grow to an astounding number.

    Disclaimer: The information presented here is for educational purposes only. I am not a financial advisor and do not provide investment advice individually. 

  • Stock market Investing 101

    In today’s post, I will talk about what you should consider if you haven’t started investing in stocks yet or if you are a beginner investor.

    Why do people fear investing in stocks?

    Before we do that, let’s look at the reasons why people may be afraid to invest in stocks. Here are some of the most common reasons:

    1. Lack of knowledge: Many people are afraid to invest in stocks because they don’t understand how the stock market works or how to analyze stocks. They may feel overwhelmed by the amount of information available and worry about making a mistake.
    2. Fear of losing money: Investing in stocks always carries some degree of risk, and many people are afraid of losing money. They may worry about a stock market crash or about investing in the wrong company.
    3. Past negative experiences: Some people may have had negative experiences with investing in the past, such as losing money or being scammed by a fraudulent investment scheme. These experiences can make them hesitant to invest in stocks again.
    4. Perceived lack of control: Investing in stocks can feel like a gamble to some people, and they may worry about not having control over their investments. They may feel more comfortable with traditional savings accounts, where they feel they have more control over their money.
    5. Peer pressure: Some people may feel pressure to invest in stocks because of their friends or family members, but they may not feel confident in their ability to make good investment decisions.

    So what is the solution?

    Infact, investing in stocks for long-term growth can be a great way to build wealth over time if done correctly. By following some simple tips, you will mitigate the risk associated with investing and will grow your wealth over time. Here are some tips on how to invest in stocks (and other assets) for long-term growth:

    1. Set your investment goals: Before you start investing in stocks, it’s important to define your investment goals. Do you want to save for retirement, a down payment on a home, or another long-term goal? Understanding your goals can help you create a long-term investment plan.
    2. Determine your risk tolerance: Investing in stocks comes with risk, and it’s important to understand your risk tolerance before you start investing. Conservative investors may want to focus on blue-chip stocks with a history of stable returns, while more aggressive investors may be comfortable with higher-risk, high-growth stocks.
    3. Research companies and industries: When investing in individual stocks, it’s important to research individual companies and industries to make informed investment decisions. Look for companies with strong financials, competitive advantages, and growth potential, and consider investing in industries that are poised for growth in the long term. This does require quite a bit of research by looking at companies’ financials. For conservative investors, it is best to start with a broad-based index fund or an ETF. By setting up monthly or weekly contributions, you can ignore market fluctuations. Predicting the future of a specific company is uncertain. Thus this risk is much higher compared to investing in a fund, which is a pool of many companies from different sectors.
    4. Build a diversified portfolio: Diversification is key to managing risk and maximizing returns when investing in stocks. Invest in a variety of companies and industries to spread your risk (through index funds or ETFs). Vanguard, Charles Schwab, and Fidelity are all good brokerage companies offering index funds. It’s important to research and compare the fees, historical performance, and other factors of different index funds and providers before making any investment decisions. Also, consider adding other asset classes, such as bonds and real estate, to your portfolio.
    5. Invest regularly and stay disciplined: Investing in stocks for long-term growth requires discipline and consistency. Set up automatic contributions to your investment account and stick to your long-term investment plan, even in times of market volatility. As I mentioned in my previous posts, investing in funds is a great way to do that. Also, by following a strategy called dollar cost averaging you can remove emotions from your investment decisions.
    6. Monitor and adjust your portfolio: Finally, it’s important to regularly monitor and adjust your portfolio as needed. Rebalance your portfolio periodically to maintain your desired asset allocation, and consider adjusting your investments as your financial goals or risk tolerance change over time.

    Conclusion

    Overall, investing in stocks can be a great way to build wealth over time. However, it is important to do your research and understand the risks involved. If you are feeling hesitant about investing in stocks, consider consulting with a financial advisor or taking a course on investing to gain more knowledge and confidence.

  • How do we change our mindset about investing?

    Whether investment should be done for the long term (retirement) or short term (if you are looking to pay for downpayment of a house), we should consider these key points:

    1. Short-term gains can be risky: While making quick profits through short-term investments is possible, it often involves taking on more risk. Fluctuations in the stock market can cause investments to lose value quickly, making short-term gains unsustainable.
    2. Long-term investments offer more stability: By investing for the long term, you are able to ride out market fluctuations and take advantage of compounding interest over time. This can provide more stability in your portfolio and increase your chances of achieving your financial goals.
    3. Patience is key: Investing for the long term requires patience and discipline. It is important to avoid making impulsive decisions based on short-term market movements and instead focus on the long-term potential of your investments.
    4. Diversification is important: To mitigate risk, it is critical to diversify your portfolio by investing in a mix of different asset classes and sectors based on returns and risks. This can help to offset any losses in one area with gains in another.
    5. Consider your goals and risk tolerance: Your investment strategy should be aligned with your personal financial objectives and risk tolerance. While long-term investments may be suitable for some, others may prefer a more active approach to investing. Some safe ways to make a reasonable return in the current market situation are investing in CDs and high-yield savings accounts. These are currently giving around 4%-5% interest rate annually. The US treasury bills and notes are also offering similar rates. It is essential to consider what works best for you and your financial situation and how soon you need the money.

    In summary, while short-term investments can offer quick gains, long-term investments provide more stability and the potential for compounding interest over time. By focusing on a long-term investment strategy and diversifying your portfolio, you can mitigate risk and increase your chances of achieving your financial goals.

  • Where do I invest and when do I start?

    In my previous post, I wrote about the various types of assets you can use for investment. To have a diversified portfolio, you should invest in a variety of assets.

    Diversification can mean two things:

    The first is diversifying within the same asset class.
    The second is having different asset classes in your investment portfolio.
    We all need a diversified portfolio

    So, for example, if you are investing in fixed-income securities, you need to invest in different types of those such as government bonds, corporate bonds, CDs etc.

    Similarly, if you are investing in stocks, you should invest in multiple companies from different industries and sectors. But when you invest in individual company stocks, you may only be able to invest in 5, 10, or maybe 15 companies.

    To achieve diversification using individual stocks, you will need to do a lot of research and invest a lot of money buying stocks from different companies in different industries.

    Thus, if stocks comprise a majority of your investment portfolio, then your investment is risky because it is based on the performance of those companies you bought shares of.

    So what’s the solution?

    For a beginner investor, who doesn’t want to put too much money in several individual stocks, the best way is to start with investing in an index fund or a passively managed mutual fund.

    What’s an index fund?

    Index fund is a fund whose portfolio are built to mimic the constituents of a stock market index. The most widely used indices in the US are S&P 500 index or Dow Jones Industrial Average, or the Nasdaq Composite index.

    Generally, Index funds should give you the same return as the index they follow. These funds buy all the stocks that are part of the index in the same proportion. So, it is like you have invested a little bit in each of those companies that comprise that market index. So yes, that would give you a very well diversified investment portfolio.

    Also, index funds are less volatile and therefore are a good investment compared to individual stocks, esp. for long-term investing. So, they are a great option for investment for your retirement.

    In my next post, I will argue why I like index funds more than actively managed mutual funds. I feel if you are sticking to read my post this far, you will be interested to know more.

    Don’t put all your eggs in one basket!

    The main point is to diversify so that if one sector or asset class doesn’t perform well, you don’t lose all your money.

    The second key thing for diversification is having different asset classes in your portfolio, such as stocks, bonds, real estate, commodities, etc.

    This brings us to the concept of asset allocation. Asset allocation simply means you decide what percentage of your money you want to put into each type of asset class.

    Asset allocation will vary from person to person, depending upon their savings, age, risk tolerance and financial circumstances.

    Finance theory suggests that generally, your investment in stocks should be 100 minus your age. So, if you are 25 years old, it should be 75% stock and 25% fixed income.

    So yes, it means you need to keep changing your asset allocation as you grow older. Later in life, your investment in stocks should be less, and high in other fixed-income assets.

    Now comes the million-dollar question.

    When should you start investing?

    The easy answer is now if you haven’t started already.

    You can start investing as early as when you first start earning. Even kids can start investing their allowance money and add to it periodically.

    Time plays a huge role in making your money grow, more than the dollar amount you invest. This is due to the power of investing!

    Your money grows overtime exponentially!

    If you are not convinced, you can take a look at my post here, where I explain this concept by using some simple examples.

    How much money do I need to invest?

    In the past, you would need a substantial amount of money to start investing. But things are much more simple now. With no minimum, no commission brokerage accounts, and fractional ownership of shares, you can start investing with as little as $10 a month.

    You can set aside $1-$5 a day and make monthly contributions of $30-$150 a monthly.

    These are some of the top brokerage firms in the U.S. – Charles Schwab, Fidelity, TD Ameritrade, and Vanguard. Stay tuned for my post on how to open a brokerage account!

    I hope you found this information useful, I will cover Real estate and commodity investment in another post! But this is useful info to start investing now.

    Disclaimer: The information presented here is for educational purposes only. I am not a financial advisor and do not provide investment advice on an individual basis. 

    Credits:

    Images- https://www.freepik.com

  • Saving vs Investing

    What is saving?

    Saving is the extra money we are left with after meeting our expenses from our income. It is the difference between our total income and our total expenditures.

    There are several things we can do with that extra money. We can either leave it at home (the worst option) or keep our extra money in a bank, such as in a savings account or invest it.

    In this post, I will cover how much money we should save in a bank vs investing it to grow it.

    Advantages of having a savings account in a bank

    First, and foremost, we need to understand money loses its value over time because of inflation. So, even though the interest paid on a savings account is not very high, we still get some interest to compensate for loss happening from inflation. Thus, it is certainly better than keeping it in your house, as you don’t earn any interest when you keep it at your house and will lose its value due to inflation.

    However, the best part about a savings account is that your money is safe in a bank, as most commercial banks in the US are insured by FDIC. FDIC is Federal Deposit Insurance Corporation that insures that will not lose their money if that bank goes bankrupt.

    In other words, people who deposit money in a savings account protected by FDIC for up to $250,000.

    So, when looking for a savings account, make sure your bank has FDIC insurance. Also, if you want to select a bank for a savings account, you should look for one that charges the minimum fee for you to hold an account.

    Another important use of keeping money in a savings account is that you can withdraw it for expenses such as a down payment for a car or a house.

    Get that Emergency fund established first

    People also keep money in their savings accounts for emergencies. I strongly feel everyone should create an emergency fund. If something were to happen to our income, we should have at least 6 months’ worth of money to survive.

    So, keeping money in a savings bank doesn’t make you rich, but it helps in creating an emergency fund and meeting some big expenditures. So before, we start investing, we should have at least 6 months’ worth of money in a savings account for emergencies.

    This can change based on the size of the family and sometimes people need up to 12 months’ worth of expenses if the family size is big.

    Anything after that, we should invest if we want our money to grow.

    What do we mean by investing?

    In finance, investing means when you invest your extra money with the hopes to grow it. The most common forms of investment are stocks, bonds, an index or a mutual fund, commodities like gold and silver, and real estate (property).

    If you are interested in learning more about these options, you can check out my post here.

    Disclaimer: The information presented here is for educational purposes only. I am not a financial advisor and do not provide investment advice. I recommend you consult a qualified financial advisor to make any investment decisions.